Court of Appeal considers securitisation noteholders' rights following default

The Court of Appeal has upheld a decision of the High Court that noteholders in a trade finance securitisation were entitled to dismiss the fiscal agent without the issuer's consent following an event of default: Banca Generali SPA v Sovereign Credit Opportunities SA & Anor [2024] EWCA Civ 886.

The decision, based on the interpretation of the contractual documentation, is highly fact specific. However, it will be of interest to market participants that the court accepted the noteholders' view that an event of default represented "a fundamental shift in the balance of power under the Schemes in favour of the Noteholders".

This change allowed the noteholders to rely on expansive post-default rights to effectively override the mechanisms for removing the fiscal agent that applied before a default had taken place. The Court of Appeal described this as making "perfect commercial sense", indicating that courts recognise the commercial implications of default and may accept arguments for significant changes in contractual operation following an event of default. 

We consider the decision in more detail below.

Background

The case concerned three separate securitisations of trade finance receivables originated by CFE (Suisse) SA. Despite differences in documentation, the relevant provisions were identical across all three structures.  

The receivables were sold to the defendant, Sovereign Credit Opportunities SA (the Issuer), which then issued senior and junior notes to noteholders. Collections from receivables were used to pay noteholders according to the terms of the notes.

The key agents were appointed by the Issuer:

• Collection Agent, responsible for the administration, management and collection of the receivables;
• Calculation Agent, responsible for calculating the amounts payable by the Issuer to the noteholders on each payment date; and
• Fiscal Agent, responsible for the organisational dealings between the Issuer and the noteholders.

None of the securitisations were redeemed in full on their maturity dates, amounting to an event of default (Trigger Event) under the terms of the notes. This entitled the senior noteholders to serve Trigger Notices, accelerating the notes and making all amounts immediately due and payable.  

Clause 14 of the Fiscal and Calculation Agreement provided:

"Following the delivery of a Trigger Notice, the Issuer shall...comply with all directions of the Organisation of the Noteholders in relation to the management and administration of the Receivables, including, without limitation, any direction to dispose of the Receivables".

Following default, the senior noteholders, represented by the claimant Banca Generali S.p.A (Generali), sought to remove and replace the Fiscal Agent, CFE Advisory Services (CFE (AS)).

Clause 9 of the same agreement outlined provisions for removing the Fiscal Agent under normal conditions, requiring the Issuer's consent and specifying termination events that justify removal. It did not explicitly provide for the unilateral removal of the Fiscal Agent by the senior noteholders following a default.

Accordingly, in purported exercise of the power under clause 14, Generali directed the Issuer to remove the Fiscal Agent. The Issuer refused on two bases:

1. Clause 9 was a "complete code" for removing agents, only permitting the noteholders to instruct the Issuer to remove the Fiscal Agent upon a specific Termination Event (involving either some form of misconduct or inability to carry out duties on the part of the Fiscal Agent); and
2. Clause 14 did not apply, since the removal of the Fiscal Agent did not relate to the "management and administration of the Receivables".

Generali subsequently brought proceedings against the Issuer and the Fiscal Agent, seeking a declaration that under clause 14 it could direct the Issuer to use its clause 9 powers to remove the incumbent Fiscal Agent.

High Court decision

The High Court ruled that Generali could direct removal and replacement of the Fiscal Agent under clause 14.

The court rejected the defendants' argument that a proper construction of clause 9 precluded the use of the noteholders' clause 14 power to direct the Issuer to remove an agent. The court noted that no such limit had been written into clause 14, and that the fact that clause 9 envisaged one form of noteholder involvement in the removal of an agent (ie instructing the Issuer to remove an agent for cause) did not exclude the possibility of other forms of noteholder involvement under other provisions of the agreement (such as the use of post-default rights to instruct the Issuer to remove an agent without cause). 

The court dismissed arguments that removal of a Fiscal Agent did not relate to the "management and administration of the Receivables". While it would ordinarily be the role of the Collection Agent to manage and administer the receivables, post-Trigger Notice clause 14.3(c) provided that the Fiscal Agent could act to "protect the interests…in respect of the Receivables". In the court's view, this could involve management and administration of the receivables. A contrast was drawn with the Calculation Agent, which was found not to have any role in the management and administration of the receivables, and could therefore not be removed by this route.

Arguments that it would be paradoxical to remove the Fiscal Agent, but not the Collection Agent, were rejected. The court accepted that the incumbent Collection Agent was entrenched, but found that there was a straightforward commercial explanation for why the roles should be treated differently. The originator of the receivables was appointed as Collection Agent because the underlying borrowers were unaware of the securitisation and it would therefore be very difficult for any other entity to perform the role. That was not the case for the Fiscal Agent.

The defendants appealed the decision to the Court of Appeal.

Court of Appeal decision

The Court of Appeal unanimously upheld the High Court's ruling and dismissed the appeal. In a short leading judgment, Lord Justice Arnold largely restated the reasoning of the first instance judge.

The Court of Appeal noted that clause 9 was not expressed to be an "exhaustive code" and that the "real question" was therefore the interaction between clause 9 and clause 14. Clause 14 contained a broadly worded power for the noteholders to issue directions following service of a Trigger Notice, which was clearly intended to effect a "fundamental shift in the balance of power under the Schemes in favour of the Noteholders".

The exercise of the Issuer's powers under clause 9 clearly fell within the scope of this power of direction, provided that the Fiscal Agent had a role in the "management and administration of the Receivables". The Court of Appeal agreed with the High Court's finding that the expanded role of the Fiscal Agent following service of a Trigger Notice, and in particular the obligation identified at clause 14.3(c) to take any actions it deemed necessary to protect the interests of the noteholders and other creditors in respect of the receivables, meant that it did.

Generali was therefore entitled to issue a direction to the Issuer under clause 14 requiring it to remove and replace the Fiscal Agent. As such, the Court of Appeal dismissed the appeal.